UK house prices recorded their first annual contraction in more than a decade in May as potential buyers were hit by rising mortgage rates, according to the Halifax lender.
Data on Wednesday showed that real estate prices declined by 1 percent last month compared to May 2022, which is the first annual decline since December 2012.
It comes as the Royal Institution of Chartered Surveyors warned on Thursday that expectations of further interest rate hikes are likely to add downward pressure on the market in the coming months.
“Storm clouds are gathering,” said Tarrant Parsons, an economist at RICS, with rising inflation likely to prompt the Bank of England to take “further action by raising interest rates, driving up mortgage rates and eventually leading to Reduce affordability and buyer demand.”
Rising interest rates could dampen the positive trend that saw the RICS house price index improve to negative 30 in May from a recent low of -46 percent in February. The survey measures the difference between the percentage of surveyors who see home prices rising and falling.
The Bank of England said the average rate of new mortgages rose to 4.5 per cent in April, the highest level since 2008. Markets expect the central bank to raise interest rates again at its next monetary policy meeting on June 22 – from 4.5 to 4.75 per cent. cent – and is priced in a step above 5 per cent by the end of the year.
“This will inevitably affect confidence in the housing market as both buyers and sellers adjust their expectations,” said Kim Kinnaird, director of Halifax Mortgages, who also forecasts “more downward pressure on home prices.”
Tom Bell, head of UK residential research at Knight Frank, expects prices to fall around 5 per cent this year because “mortgage rates will continue to rise with wage growth keeping core inflation stubbornly high”.
However, he noted that unlike the financial crisis of 2008-2009, the decline in prices will be limited by higher wages, lower unemployment, mortgages and savings built up during the Covid pandemic.
Halifax reported that average property prices have fallen by around £3,000 over the past 12 months and down by around £7,500 from their peak in August. However, prices were still up by £5,000 since the end of last year, and £25,000 higher than they were two years ago, reflecting the pandemic boom.
According to Halifax, the annual decline was driven by existing homes and apartments, which both fell 1.9 percent. Terraced and semi-detached homes posted smaller declines of 1 per cent and 0.5 per cent respectively, while detached house prices increased marginally by 0.4 per cent.
Southern England was the worst performing region, with the Southeast, South West and Greater London regions posting annual contractions of 1.6 per cent, 1.4 per cent and 1.2 per cent, respectively. Instead, the West Midlands region remained the best performer, with an annual increase of 2.7 per cent.
Earlier this month, mortgage company Nationwide reported that house prices in the UK fell at an annualized rate of 3.4 percent in May, the biggest drop since 2009.
“The pressure of mortgage affordability is not only affecting the dreams of aspiring homeowners, it is also reverberating throughout the housing market,” said Myron Jobson, senior personal finance analyst at investment platform Interactive Investor.
